Ahead in the Count

When Bad Teams Land Good Free Agents

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When the Orioles signed Mike Gonzalez on Friday, the collective sound of baseball fans' palms hitting their foreheads reverberated throughout the land. The Orioles have virtually no chance of competing in 2010, and they cost themselves their second-round pick. They simply will not have enough games to close, and those games will not push their team over the edge into the playoffs for this season. Instead, keeping the draft pick and concentrating their resources on scouting and development seems to make much more sense.

Similarly, when Gil Meche signed with Kansas City after the 2006 season in which the Royals had lost 100 games, many rolled their eyes at the absurdity of sinking $55 million into a pitcher who would only decline throughout the contract. Even if the Royals became good by the end of the contract, Meche likely no longer would be, and his contract would be an albatross as they tried to improve.

Nate Silver's graph of the marginal value of a win shows that teams on the cusp of the playoffs will benefit more by adding free agents, as those players have a high probability of pushing them over the edge and generating sufficient revenue to justify their spending. Thus, it would make sense that the best teams would be the ones who should be spending on free agents, and this is typically what we observe. On the other hand, we see exceptions like Mike Gonzalez and Gil Meche, who appear to be irrational signings.

The question that I have asked myself in this article is when it would be smart for a bad team to sign a free agent. The problem with signing a pitcher like Meche is that, at the end of the contract, he would be 32 years old and was very likely to have experienced an injury or suffered a decline in value. For teams that may improve over the life of the deal, it may be rational to add a young free agent who is likely to age well and get the value of his performance later in the deal. This is a simple example of when making such a signing could be rational.

On the other hand, signings like the Orioles grabbing Mike Gonzalez represent some of the worst situations-those in which a team loses a draft pick. The return on signing high draft picks is high, and such players can be the ones that make a difference in bringing a bad team to a competitive level. Therefore, it is a pretty good rule of thumb for bad teams to avoid signing players who cost them draft picks because they should value them more. Even though the first 15 picks in the draft are protected, a second-round pick still makes the majors frequently-nearly half the time, actually-so an early second-round pick is quite valuable.

The less obvious situation is one in which a bad team has a high probability of trading that player at the trade deadline for subsequent value. Late last July, during high Halladay season, many teams tried to grab Doc and other coveted players from teams with little hope of making the playoffs. At the time, many sabermetricians attempted to use trade value metrics commonly used during the offseason to approximate the value in prospects that the Blue Jays should expect in return.

However, I pointed out that these articles made a critical mistake in assuming that the value of adding Halladay in the middle of the season was simply his full-season value multiplied by the fraction of the season remaining. What I explained is that the return to a player is non-linear. As the marginal value of a win graph shows, a large portion of a player's value comes from increasing the probability that his team makes the playoffs. The marginal value of a win is essentially derived partly from considering the probability that one win makes the difference in a team's season multiplied by how many wins that player provides.

Much can happen during the baseball season that can change this probability, but for teams right on the cusp of making the playoffs, the odds of one game making the difference in their season increases. Last year, the team that I estimated to have the most value for adding a player like Halladay was the Tigers, coincidentally enough. Who thinks that adding Halladay would have helped them when they faced off against the Twins in game 163 last year, or during the series the previous week against the Twins? Indeed, it was more predictable in late July that the Tigers would need someone to put them over the top than it would have been the previous December. The value of adding a player increased for the Tigers during the season. Similarly, the Mets value for adding players fell dramatically by the deadline. Early in the season, they were right there with the Phillies and Braves, and there was a reasonable chance that one win might make the difference in their season. As it turned out, Joe Mauer could not have put them over the edge in 2009. It is tough to say whether you will be the Tigers or the Mets ten months before the end of the season, but with only two months to go, this crystallizes.

As my article explained, if you estimated the marginal revenue of having one season of Halladay in the previous off-season, you may have gotten approximately $27 million (I have since revised this number upwards in light of recent research by Sky Andrecheck). However, a number of teams still would have seen their marginal revenue of adding Halladay equal to about 65-70 percent of this in July despite only 43 percent of the season remaining.

This segues perfectly into my current question of when a bad team should sign a free agent. Suppose, for example, that a team with low odds of making the playoffs signs a player worth four wins above replacement to a one-year deal. Further, for simplicity, suppose that this player was not offered arbitration and would not cost any draft picks, and that the team could expect no draft pick compensation after the season. The cost of such a player who is a sure thing to produce for one year might be about $21 million. With 70 games remaining, such a team would already have paid him about $12 million of his contract, leaving $9 million to go. Despite the $21 million being fair value for his services at the time, the current $9 million remaining is far less than his value to those teams that find themselves on the cusp of making the playoffs.

Further adjustments to my model from last year that increase the value of a win ignoring playoff odds, and increase the values of making each stage of the playoffs similarly demonstrate that a team with a replacement level player would expect to get about 70 percent of the $21 million in revenue to be generated for them between the deadline and the end of the season if they traded for him. This is $14.7 million. Thus, the bad team has a player on their hands in July who is worth about $14.7 million and costing only $9 million despite the fact that they paid fair value and won the bidding war for his talents the previous December. If they trade him, they can acquire a prospect worth about $5.7 million, which would be a prospect ranked outside the Top 100 overall prospects but still representing a mildly decent chance of contributing at the major-league level. The question is whether or not it worth spending $12 million for that prospect. That depends on if the team the received $6.3 million worth of value for the first 57 percent of the player's season.

If the odds of making the playoffs are absolutely zero, this would probably fall short. Using an adjustment factor to increase Nate Silver's valuations of making the playoffs and valuations of a win with no impact of making the playoffs proportionally such that it represents the dollar value of a win as presented by Sky Andrecheck, the $1.35 million per win for the 2.27 wins provided would yield about $3.06 million in value. This would fall short of the $6.3 million cost.

However, for a team that is highly unlikely to make the playoffs as currently projected but still with some chance of lucking their way in, there actually is value to pursuing this strategy of signing a player that you expect to trade in July in all likelihood.

Consider a team projected to win 77 games in a division/league that would probably require about 90 games to make the playoffs. Suppose, for simplicity, that such a team in the playoffs would have a 45 percent chance of winning any game pitched by their current first three starters, a 39.3 percent chance of winning any game pitched by their current fourth starter, and a 50.7 percent chance of winning any game pitched by the prospective four-win pitcher. This team would have a 2.5 percent chance of making the playoffs before adding the four-win player, and after adding the player and increasing their win projection to 81 games, they would have a nine percent chance of making the playoffs. This team would only expect about $9.2 million from signing the player for one year if they could not trade him.

However, they would still find it advantageous to sign him. Suppose there was an 80 percent chance that they would basically be out of contention at the trade deadline. If so, they would have surrendered $12 million in services worth about $3.06 million to them and would get about $5.7 million of value in prospects back at the end of the deal, thus costing themselves a net $3.24 million.

If the team happens to be in contention, then the trade has paid off very well, though. They can now expect maybe a 60 percent chance of making the playoffs and getting $50 million on average. The 60 percent figure includes some sure-thing scenarios and some borderline cases where they are in contention enough to hold on to the player, and the $50 million includes some cases where they win series they had 40-45 percent chances of winning. In this case, they will spend $21 million over the year. The win value excluding the possibility of making the playoffs was worth $5.4 million, but the player would now be worth $30 million for playoff added value (60 percent of $50 million), and a total of $40.4 million at a cost of $21 million. The team would have netted $14.4 million.

Essentially, the team would have about an 80 percent chance of costing themselves $3.24 million and a 20 percent chance of making themselves $14.4 million. This is a profit of $300,000 in expectation. Adjusting playoff probabilities to consider the chance that the team may actually be good if they find themselves in contention, this number would get even higher.

Thus, we have found a very specific set of criteria for which a bad team should sign a free agent, even with little to no chance of making the playoffs during the duration of the contract:

The team should at least have some small chance of making the playoffs, rating as a 75-80 win team before adding the player.

The team should be allowed to trade the player easily. This means we rule out no-trade clauses, signing 10-and-5 players who have automatic no-trade clauses, and signing players to multi-year deals that grant the player rights if traded early in the deal.

The team should be in a large enough market that they would benefit from signing the player if they were a contender.

The team should not have to surrender draft picks for signing the player.

The team should expect to be able to find multiple possible trade partners if they fall out of contention.

The last rule is the tricky one that requires some explanation. Pitchers are the best example of a type of player that should generate multiple bidders if put on the trading block in July. Teams generally require four starters in the playoffs, and most team's fourth starter is no guarantee of a win. Nearly any team in contention would at least listen about trading prospects for a starter, and certainly at least two teams in contention would have nearly replacement level starters in their fourth starter slot. Outfielders who can play multiple positions typically have some value as well as corner outfielders who can become DHs on American League clubs. Catchers and middle infielders are other examples of players for whom there may not be a market midseason. If there is only one bidder for your shortstop at the deadline, then you will not get fair value for him. Thus, position players are often risky if they are not players who play multiple positions. Pitchers represent the best bet.

Therefore, when you see older pitchers signing one-year deals with non-contenders and wonder why these clubs would consider adding a player so unlikely to push them over the top, check back in July and see if they are looking to net a prospect or two for that same pitcher. The Mets, Astros, Brewers, Giants, White Sox, and Tigers are all teams that have outside chances of making the playoffs this season but are unlikely to do so. However, all six of them come from large enough markets that they would gain a lot of money from a pennant run. Although these teams may not find it worthwhile to sign a multi-year deal with a no-trade clause to Adrian Beltre, inking a pitcher such as Joel Pineiro or Jon Garland might pay off substantially even if they do not put them into the playoffs.

Matt Swartz is an author of Baseball Prospectus. Click here to see Matt's other articles.
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I'm stunned at the assertion that Milwaukee is one of the "large enough markets" to benefit from a pennant run. Milwaukee's is in fact the SMALLEST Metropolitan Statistical Area that has a team in major-league baseball, and furthermore, is not well located to draw fans from beyond the borders of the MSA, what with the Chicago teams to the south, the Twins to the west, and acres and acres of water to the east. One of these things is not like the others, as they say...

True, Milwaukee is small. I meant in terms of having the incentive to spend on free agents which has more to do with marginal revenue added from a win than it does from total revenue added. The general point is that Milwaukee has the incentive to spend on free agents as demonstrated by the fact that they do when they feel they're in competition.

Then with some player development and a few more moves, got them to the World Series the next year.

It is hard to add 35 wins in one off-season.

This analysis about the perils of signing FAs when you are not in the winning phase of the success cycle is often on point. However...
It seems like it often leads to the following: If you are not contending this year, give up and play to win a few years from now. This leads to "constantly rebuilding organizations" like the As, who NEVER seem to go for it. This makes for very demoralized fan bases. Give me the Mariners of the past 3 years versus the As of the past 3 years anyday- one team is gearing up to go for it, the other is gearing up to contend in 4 years, every year.

1) You can't sign a player that is a 10-and-5 guy, because the last five years have to be with the same team. So if a new team signed Derek Jeter next year, he'd have his ten, but not his five. I guess your point could hold if you're discussing a re-signing.

2) The latest CBA removed the clause that gave players the right to demand a trade in the middle of a multi-year deal, so that caveat no longer applies.

Thanks. I did mean re-signings for multi-year deals. I was thinking more along the lines of teams like the Astros who spend money but don't win. If they re-upped a 10-and-5 guy, they wouldn't get any value from trading him.

I didn't realize that part had been removed from the CBA. Thanks for that-- that really does expand the validity of the type of signing I'm talking about. I guess it makes sense given the Derek Lowe rumors, since he's not pulling any trade-demand claims.

According to Cot's Contracts, any contract signed before the effective date of that CBA could still demand a trade. Obviously, most contracts were signed after that date (including Lowe), but some like, say, Carlos Beltran could still use this clause. Although, he's a 5 and 10 at this point, so it seems kind of unlikely that he'd agree to a trade and then demand a trade the next offseason. I'm not sure which side of the CBA Alphonso Soriano, J.D. Drew and Barry Zito fall under. The only player that was signed definitely before the 2007 CBA and is not a 5 and 10 that I can find is Kevin Millwood, but he'd be a free agent next offseason anyway.

You re-sign a 10 and 5 guy. If the Padres re-signed Giles, he would still have 10 and 5 rights. Same with the Orioles and Melvin Mora. The Mariners with Beltre. The Angels and Vlad. The White Sox and Dye. If the Yankees sign Damon to a multiyear deal, he'll be 10 and 5 after the end of the 2010 season. Randy Winn would get it with the Giants part way through 2010.

I'm not convinced that the Gonzalez signing is "irrational" or a "setback.", In fact, I disagree. By your 5 rules, the Orioles pass 4 of them. The draft pick loss is a downer, that's correct, but look back just a few months ago to the Sherrill deal. Admittedly, Sherrill was a bit cheaper and under team control for a few more years, but the return was significantly greater than a 2nd-round pick. No reason to believe they couldn't get 2nd-round value from a Gonzalez trade if he's not needed.

Two other factors in favor:

1. It's a two-year deal. I don't think it's irrational for the Orioles to look at the situation and say (a) we can contend in 2011 and (b) we may not get this good a value next winter, so let's act now.

2. To my knowledge, the Orioles have no stated or implied payroll limit, and if they do, they're nowhere near it. I don't have the exact numbers, but if they're carrying $45MM in salaries and are capable of paying $80MM, who cares what they do with the extra $35MM? Unless they plan on carrying the savings over and spending $115MM in 2011 (and I've never heard of a team doing this), what does it matter? As long as it doesn't preclude the team from making future moves, and I've seen no evidence that it should here, I don't think the financials even come into play.

Again, I'm not saying the analysis is wrong. I just don't think it's relevant. If the Orioles had just $10MM left in the bank, we could have a useful discussion on whether or not this was the best way to spend it. To my knowledge though, that's not the case.

There is no Bud Selig Award for Maximizing Cheapness (as far as I know).

I guess if they can trade him for more value than the draft pick, that would be worth noting. I imagine that it would probably even out in terms of overall value, and I think an extra selection from a country of amateur talent might give them more selection than an equivalent player from a contender's minor league team. Then again, if they want someone major-league ready, this may not be true.

The Orioles may contend in 2011, but they probably won't. I guess it depends on how much happens with all those high upside arms that aren't there yet. The thing is that the second year of a deal is almost always poor value compared to the first. This is bound to be especially true for injury prone pitchers because the attrition rate is higher. I think if the Orioles look like they could make a run in 2011 next off-season, there will probably be comparable players available. I see more validity to violating this strategy if it's a shortstop with a very low attrition rate who looks like he could be good for many years and your club has no shortstop available.

There is always an opportunity cost of spending money. The Orioles could spend that money on the draft, for example. In fact, they are the perfect example of a team that should spend money on the draft. If you check out my very first article published at BP at the beginning of the competition, it's about the repeated prisoner's dilemma aspect of the draft. Teams in the AL East aren't going to convince the Yankees and Red Sox to implicitly mimic their strategies of not spending on expensive draftees requiring above-slot bonuses. The Orioles could do themselves a favor by going above slot for guys without really affecting the behavior of their competitors the way that the Natonials risk doing when they go over slot. The O's could also spend money in Latin America, on scouts, etc. There's just no reason to think of teams spending money as "budgets" and "left in the bank"-- check out Joe Sheehan's discussion of baseball teams as investors rather than risk-averse loss minimizers today.

If you play the Gonzalez signing through, it is possible that the Orioles' endgame in most scenarios is to flip him at the deadline to a team that is willing to pay a price (in terms of prospects) that exceeds the value of the 2nd-round pick that the Orioles forfeited?

It certainly is possible, because it entails basically getting a premium worth $5MM or whatever the compensation is to signing that player. I guess it's just a step backwards to hopefully to take a step forwards, and it's probably not wise in many situations. This is a good point, though-- thanks for highlighting it.

While I may sound like a fan who is unaccustomed to hard economic analysis with this post, some teams need to consider local conditions in deciding whether to sign a free agent.

Let's look at the Orioles, since you criticize the Mike Gonzalez signing. The Orioles management is, I'm sure, well aware of its shrinking attendance. There is a growing feeling in Baltimore that the Orioles have been losers for 12 years, and, especially since they are in the AL East with the Yankees and the Red Sox, are likely to be losers into the indefinite future. Many in Baltimore are blind to the improvements in the team, and the promise in their young players, over the last year or two, and look solely to the annual win (and loss) total to determine the direction and development of the team. If the team does not win more games, it is not improving.

In this environment does the signing make more sense? Is it necessary to improve the team's performance, even if it doesn't get them to the playoffs, so management can sell the team's improvement to its fan base?

The lead Orioles story in the local paper yesterday was headlined "All the right moves aren't all that exciting". It generally praised the O's moves thus far in the off-season, but asked where is the trade for Adrian Gonzalez, where is the signing of Matt Holiday or a similar "impact" free agent. Is the signing of Gonzalez necessary to sell hope to its fan base?

Is it necessary for a "bad" young team to butress its bullpen so it wins "the games it should win" (read: the games it is leading)so the spirit of the young players is not crushed by the losing?

I don't have answers to these questions. Moreover these questions sound suspiciously like the kind of sports writing pap that passes for analysis, which is blind to the hard realities of the development of a team.

The Orioles face a skeptical fan base. They must show that they are working to improve. If they continue to lose with the kids, claiming they are working to improve in the long term, they will continue to lose the fan base. Some wins now are important, eve if it doesn't get them to the playoffs.

I understand where you're coming from here, but I still don't think it's wise. The Orioles' fan base has certainly suffered the last 12 years, and becoming a little better certainly feels better. I'm just not sure that it sticks throughout the season. The value of making the playoffs is just so much higher than the value of having a more attractive player, and the value of that really wanes quickly. I have not done research myself on the marketing value of players, but I believe I have heard that the value of actually winning more games-- and specifically, of making the playoffs-- dwarfs the value of giving the fan base a bump from a 65 win team to a 70 win team. Basically, I don't think the Orioles are going to see a boom in revenue until they make the playoffs. When they do it next, whenever that is, I suspect that there is a lot of money that will flow in and reinforce their position as a team in a pretty large market. The presence of the Nationals, I believe, helps hardcore fans by taking away a lot of easy revenue and forces them to be better to get fans. I tend to think that the marginal revenue from a win is larger when you have local competition even if the total revenue is lower. I don't have proof of that, though, it's just something I'm suspicious about. Regardless, as someone who followed the Phillies in the mid-to-late 1990s, I certainly am sympathetic to fans who want a few more wins. I just think it pales in comparison to making the playoffs and I think the Orioles set themselves back in pursuing the target of giving the fans something to come to the park for in September and hopefully October.

I think this one has two parts, both worthy of a little bit of further thought. Is losing detrimental to the development of young players. Maybe there's some sort of (dare I say) psychological price to be paid for coming up in a losing environment? The other issue is the fan base. In Vegas, it's well-known that people generally have a point where they feel their gambling losses are too much, and so they stop. (Vegas manipulates the heck out of this, btw) Maybe there's a point where Orioles' fans will cry uncle and leave en masse. That one would be harder to quantify though...

On the true business side, how usefull is the marketting aspect of signing a free agent? For example, I sign this guy, then I have a big press conference introducing him, I mention to all my season ticket holders how we just signed so-and-so, so come out and see him play, I contact anyone who had bought mini-plans and see if they are interested in more, I push the signing at the mid-winter banquet, and at the winter carnival. I make sure all the local news affiliates pick up the story and include some positive "we're so excited about next year" quotes from players, coaches, and the front office, etc....

I addressed this a little in my response to the previous post, but basically my understanding is that this value is small compared to the value of winning games. I would need to look into whether there has been a lot of research towards this, but I believe I have heard that the conclusions were that winning is the real money-maker.

I think there are some situations where it can make a big difference, and not just with Japanese players. I remember being outside of Cincinnati after they traded for Griffey. There was a very definite buzz that I am sure leaded to ticket sales (granted, it was a move that was supposed to push them to the playoffs). I would think, had Baltimore signed a guy like Texeira, they would have seen some increase at the gate (studies are good, but how many times has $100+ million dollar free agent sign for a team that wasn't expected to make the playoffs?).

I think getting marginally better isn't a bad strategy for a team, like Baltimore, that seems to be on the upswing. Worst to first seasons are great, but it is past the all star break when people realize that their team are have a chance to make the playoffs. Going from .500 to playoff caliber may convince fans a lot early in the "good season" that the team is legit.

One comment about losing the draft picks. If it is a short term deal, is it likely that the signing team will recover those draft picks after the player departs (if they don't trade him)? If they do trade him, the receiving will get the picks, thus, allowing them to offer more.

I suppose that bad teams may get some gate boost in the first month or two after spending $100 million, but I don't see any reason to assume it's more than a drop in the hat compared to the cost. The teams that spend $100 million on players are typically the ones that are willing to pay for an albatross late in the contract because it's rare that those players are producing reasonably on a per-dollar basis towards the end of the contract. I think that's why we're having trouble thinking of examples.

I'm not saying going from 65 to 70 wins is useless. I'm saying it's generally not worth the price because you have to outbid teams who would go from 85 to 90 wins.

The picks thing-- it's dangerous. You don't necessarily get picks later. It depends on how they perform and how the rules change over time.

I think another point that should be considered, is what the maximum salary a free agent can sign before we start asking these questions?
For example, if a GM of a non-contender has a choice between freely available talent and a player he values much more highly and who's contract cost would be marginally above the minimum salary, is it a good economic decision?
This is pertinent because it happens much more often in roster machinations.
An example, the Blue Jays have no real hope of contending next year. They did not have an MLB catcher on the 40-man. They could have re-signed Raul Chavez for around the league minimum (if they did anyway). They could have promoted JP Arencibia, who does not look ready. Or they could spend $2M on recently non-tendered John Buck, who they seemingly (rightfully) value higher than either Chavez or Arencibia.
How do you judge that move?

I think it comes down to the cost of promoting players. If you have no other option than to promote your young catcher who you have the rights to for only six years, there is a hidden value to spending $1MM on an older catcher in that you retain the services of the young catcher when he is better (i.e. if you expect him to be better during the 2011-2016 time frame than 2010-2015, because you think he will be better in 2016 than in 2010).

The playoffs aren't the only objective for teams in spending money. Some teams draw better if they just finish over .500 -- Oakland for example. The extra revenue from better attendance can make spending on free agents worthwhile.

That's true-- I used the approximations above based on Nate Silver's model, readjusted upwards for inflation and to match the current $/win estimate that I felt make sense. It was an increase of about $1.35MM/win with about $50MM+ generated by reaching the playoffs. That generated the $5.25MM/win that Sky Andrecheck had found in his recent article, and was proportional to the average $0.75MM/win and $30MM playoff estimate that Nate had found several years ago.

Yeah, I guess that was what I was thinking. Perhaps I'm too bullish about the Twins, but they really do look like a real competitor for 2010, moreso than the Tigers who are behaving like sellers and the White Sox who have more holes than the Twins in my opinion.

Second, I agree with TGisriel and Ira that you're not paying enough attention to the business side of December and January free agent signings. Right now, thousands of season ticket holders are trying to decide whether to renew, and a well-timed free agent signing could send a signal to those fans about the team's intentions. For example, just when I had concluded that the Dodgers were going to spend no money at all for the rest of eternity, they up and sign Jamey Carroll. Now I'm starting to wonder if perhaps the Dodgers have a free-agent budget after all, and I'm more likely to renew my season tickets.

I certainly agree there is some effect. I estimated $1.35MM/win, so signing a mid level pitcher who is worth two wins for each of two years would be $5.4MM regardless of actual playoff impact. That's a lot of season tickets I think. I suspect that's the same source of revenue we're thinking about? I think that should cover it, but I don't have exact information on season ticket sales and all I'm doing is reporting my inflation adjusted estimates of previous work when I give the $1.35MM/win estimate.

One thing not considered here - there is a practical limit to how many young players can be developed at one time. There is a utility to having a couple of average veterans who can toss 200 innings or 60 out of the pen even if they are only replacement level. Throwing young pitchers into situations they can't handle can retard their long term development. I think Milwood and Gonzalez will help out Matusz et al even if they are quite average.

I thoroughly agree with the sentiment but not the conclusion. It's exactly the reason that these teams should be giving small contracts and minor league deals to replacement level pitchers. There's no reason for them to waste $15MM giving Marquis money that some minor league veteran might would do for $1MM.

Why assume that the team could expect no draft pick compensation after the season? Aren't most signable free agents going to garner at least type B? Does the analysis change if the team will get a pick, and how so if the guy is Type A or Type B?